ARMSTRONG: Major Central Bank May Fail Next Year

Many analysts are fearful of an impending downturn as early as next year. In an exclusive interview with FS Insider, legendary forecaster Martin Armstrong of ArmstrongEconomics.com explained his outlook on the global economy and markets, including a bold call that, as early as next year, "we're looking at a central bank that can go bankrupt" — a topic that will be the focus of a July conference in Frankfurt.

Armstrong is a unique, contrarian thinker and has made a number of accurate forecasts over the years, especially since we've been speaking with him on our podcast. A key theme of his analysis is that economic growth is likely to remain stagnant as nations around the globe struggle with large debt burdens. However, rather than calling for a collapse in the dollar and the US stock market, as many bears have long predicted, Martin has taken the opposite view, focusing instead on the needs of institutional investors to earn yield by increasingly allocating capital into stocks and highly-rated corporate bonds, which helps to fuel the stock market higher.

Economics Is Flawed

The problem Armstrong sees with most analysts is that they focus too much on domestic markets. Economic thought is in a primitive state, he said, and hasn’t developed enough to be reliable.

“Economics is in the Middle Ages,” he said, and basically argued that the global markets are much more complex than any single economic framework.

Other factors play into markets, and particularly capital flows, Armstrong noted. For example, the United States went bankrupt in 1896 and J.P. Morgan had to bail it out. Was that the end of America?

Economically speaking, it would've been very difficult to predict that, years later, the US went on to become the world’s largest economy because of the events during WWI and WWII, which shifted massive amounts of capital into the US.

Bear Trap, a la 1987

As a result of the Federal Reserve’s manipulation of interest rates, instead of stimulating the economy, we’ve seen investors turn to the stock market for safe returns.

“The stock market is now the source for money,” Armstrong said. “That’s where big money goes. Capital has been leaving the bond markets more and more, and is shifting into the private sector.”

This dynamic is creating the conditions for a potential bear trap in 2018. In this scenario, Armstrong sees markets moving down with negative sentiment spiking.

This will create the energy necessary for a slingshot move higher, as we saw in the 1987 crash, he noted.

Move Higher After 2018

Years before the event, Armstrong called for the Dow to hit 18,500, which was reached in 2016, and then for another move higher to 21,000, which was hit in 2017. Heading into next year, he's a bit more cautious but believes the Dow has the potential of moving as high as 40,000 before this bull market is finally over.

“We can get a short-term correction into 2018, but this thing’s going up a lot higher,” he said. “Once it gets through 23,000, it will probably go to about 40,000. Everything’s relative”—referring to extremely low bond yields and the US vs. the global economy.

The move out of government bonds and into equities will fuel this rise, he argued. Ultimately, we should expect the contrarian position — that we aren’t in for a new bear market — to play out.

“This is the most hated bull market in history,” he said. “We’ve been up since 2009. How many people are still bearish? They won’t admit they’re wrong.”

ECB Failure Next Year?

The problems developing in Europe stem from government, not the private sector, and a banking crisis appears to be developing there.

“In Europe, they look like a stiff wind can just blow them right over,” Armstrong said. “US banks are not there yet. Give them a few more years.”

The lack of confidence in governments and banks will ultimately create the conditions where capital begins to move, leading to a threat to the European Central Bank itself.

“Europe is basically a basket case,” he said. “We’re looking at a central bank that can go bankrupt.”